Noncredit Services

Noncredit services are fee-based services that do not involve the extension of credit that a lending institution offers to customers. Non-interest income generated from noncredit services can be a significant source of revenue for banks, and will limit the erosion of profitability when net interest margins are squeezed in a declining interest rate environment.

Historically, the basic profitability model of a bank has been lending to customers at X% and paying Y% on deposits held at the bank. X-Y% is the spread that brings money to the bottom line. However, another pillar of profitability has developed for banks that does not involve using the balance sheet to generate income. Various noncredit services for retail and corporate customers are routinely offered by banks. For retail customers, aside from checking and savings accounts, such services could include debit card processing, stock trading brokerage and asset management. For small businesses and larger corporate entities, noncredit services include cash management, payroll processing, merchant transactions, merger and acquisition advisory or other corporate finance services, loan syndication and agency, and insurance underwriting. Collectively, these services produce commissions and fees for a bank. Not a single dollar needs to be loaned out to capture this type of income.

Citigroup Inc. recorded approximately $16.0 billion in noncredit service income in 2017, roughly 36% of its net interest revenue (interest revenue minus interest expense, or the spread in terms of dollar amount). The bank derived a majority of the income from commission and fees described above and the balance from administration and fiduciary fees. The income from noncredit services for the bank has provided a measure of stability to overall earnings during a period of suppressed interest rates as a result of quantitative easing policies by the Federal Reserve Bank. Net interest revenues had declined from around $48 billion in 2013 to $45 billion in 2017, but contributions from noncredit services more or less held steady.